Nest's plan to stop brownouts before they start

The makers of the Nest thermostat are coming up with new ways to tame demand for energy at peak times.

Story highlights

The Nest is a much-touted thermostat created by a team in Silicon Valley

Nest Energy Services, a series of energy-saving programs, debuted on Earth Day

The idea: halt energy-demand overloads and save consumers money

Living in Texas is unimaginable without air conditioning, especially on steamy summer afternoons. Unfortunately, there simply isn't enough power to go around -- and when the energy companies suggest that residents not cool it during those hours, people ignore the pleas.

But recently Les Bowles, a retired American Airlines pilot living in a suburb not far from the Dallas-Fort Worth airport, became part of a possible solution. He is a beta tester for a program called Rush Hour Rewards, wherein a lusciously designed thermostat with artificial intelligence and an Internet connection eases his domicile into a zone of thrift and earth-friendliness.

True, temperatures can inch into the mid-to-high seventies -- but the thermostat orchestrates the AC so the increase sneaks up on him. If he does get uncomfortable he can always override the procedure and lower the temp, but he hasn't done it yet; he says he's learned to trust the wisdom of the thermostat in such matters. Overall, he's come to love his thermostat. "I'm kind of overwhelmed and amazed," he gushes. And his power bill, he reports, hasn't been as low for decades, when he was a much younger man living in a basement apartment.

His thermostat, as you might have guessed, is the much-touted Nest, created by an all-star team of Silicon Valley designers, engineers and computer scientists, headed by the iPod inventor Tony Fadell. Launched in October 2011, this well-funded team bet that people would happily pay $250 for a gadget with flashy design, a simple, powerful interface, and a learning capability that figures out your schedule and adjusts temperatures accordingly.

CEO Fadell has always believed Nest was making the first thermostat that people would be happy to get as a gift, and indeed he reports that last Christmas was the biggest installation day in company history. (He won't give sales figures, but points to the company's rapid growth as evidence that Nest is hitting its marks.)

On Earth Day, Nest announced what may be viewed as the second stage of its strategy. Now that is has invaded thousands of homes with its smart device and gathered data about its customers' climate and living habits, Nest can begin using its powers in a new way. This summer, the company will roll out a series of programs called the Nest Energy Services.

This pivot is in the best tradition of companies like Apple and even Amazon, whose hardware devices have evolved to become front ends for services like iTunes or Amazon Prime Instant Movies. Explaining how this model works in the thermostat world, Fadell compares power utilities to record labels. Just as Apple provided services to help customers link with the labels to get music, Nest is building digital services to help customers save money. Unlike the case with record labels, however, Nest isn't eroding the utility business model, but fulfilling a long-term need -- getting customers to change their behavior during periods of energy scarcity.

"Until now, if utilities wanted customers to change their behavior to use less electricity at those time, they instituted what was called unilateral demand response -- they wouldn't automate the process, they'd turn off the air-conditioning whenever they wanted. It was like DRM during the iPod days -- where companies like Sony said, 'I am the guardian, and I'm going to tell you what to do.'"

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Nest Energy Services is the company's attempt at a DRM-free conservation system. The most basic service takes advantage of Nest's existing technology, which features an Auto-Away process that learns the users' schedules and adjusts temperatures when no one is home.

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Because this feature is a proven energy-saver, customers qualify for a number of conservation rebates. Since Nest is a connected, verifiable system, customers can bypass the usual complicated application process and get and instant $100 online rebate. (Fadell likes to point out that previous rebate programs required filling out several forms and waiting six weeks for reimbursement.) Another rebate program gives customers a free Nest if they agree to participate in specified conservation plans.

But Nest's more exotic services focus directly on tackling the demands of air-conditioning a home in summer. The most dramatic is Rush Hour Rewards, which kicks in only a few times a year, during the late summer afternoons when consumption peaks.

Those demand spikes are unavoidable mini-disasters for energy companies -- their own grid doesn't have the power on hand, and the utility has to buy it elsewhere -- competing with other utilities trying to keep the lights on for their customers. Prices shoot up like bottle rockets, and kilowatt hours that were 15 to 20 cents just hours before suddenly hit the legal limits that utilities can charge residential customers --around $15 or $20, a hundred-fold increase. (If the prices are higher, utilities must swallow some of the cost themselves, as regulators limit how much they can bill customers.)

That's why Rush Hour Rewards is so crucial. If even a small percentage of customers use less power in those times, it makes a huge difference. Nest aspires to accomplish that.

"Residential air-conditioning is the peak load problem, and we're able to tackle the load-shifting in a very automated way," says Matt Rogers, Nest's engineering VP.

In exchange for some cash (between $20 and $60 a season), participants in the program get alerts via thermostat or their phones that a Rush Hour event is happening. (Nest promises it won't be too often and never on weekends.) Nest employs sophisticated algorithms that take into account local weather, the customer's usual schedules, and the temperatures that its customers consider comfortable -- which it often knows better than the customers do.

This allows Nest to micro-manage the air-conditioning so that it runs as little as possible during the three-hour demand spike, with the inside temperatures at most only three degrees above the usual. (One trick: "pre-cooling" the house with an extra burst of chill before the higher demand kicks in and prices rise.)

One key aspect of the arrangement -- and the one that will probably be most effective in getting skeptical customers to sign on -- is that users can opt out of the program at any time. If you feel it's too hot, a single spin of the temperature dial checks you out and allows you to set a temperature that would give Al Gore heart palpitations. (Gore, by the way, is a Nest funder.)

Those same instant opt-out features are also available on another service in Nest's program, a longer-duration conservation system called Seasonal Savings. In exchange for a more substantial energy-bill savings (5-10% of the summer's air-conditioning tariff), participating customers agree to an "Auto-Tune" of their Nest, a three-week adjustment period where the algorithms plan a regime that routinely rejiggers air-conditioning use during the day.

Ronney Nanney of Cedar Hill, Texas, has been beta-testing the Seasonal Savings program, making meticulous measurements of temperature fluctuations. To his surprise, he says he experiences no discomfort when his bright Nest display reports 75 degrees or even an occasional 78. "As a population we think that we should be comfortable at 72 or 73 degrees, but I'm OK with leaving the Nest alone," he says.

Nest's field tests indicate that customers generally accept the adjustments -- 80% of those beta-testing Seasonal Savings hewed to the newly adjusted schedule. Nest also reports that in its Rush Hour Rewards test of 2,000 Houstonians, only one-tenth of the experimenters felt too warm. But the official rollout, involving real people and not relatively motivated beta-testers, comes with the worst summer heat still ahead.

"My worry is not about our algorithms, but that these alerts come on the worst days, when it's so uncomfortable to begin with," says Yoky Matsuoka, Nest's VP of technology, "And then we're asking them to do something even more uncomfortable. That's one thing we're going to learn this summer."

To Fadell, Nest Energy Services is not only a major step in resolving a significant problem, but a milestone in the broader category of the so-called "Internet of Things." Nest has been seen as a harbinger of an era where zillions of devices all have their own IP address and maybe even email addresses and Twitter accounts. Fadell doesn't duck the label, but asks that people view the phenomenon in a more nuanced fashion.

"The Internet of Things is not about getting you more data for your bathroom scale -- it's about combining these devices with existing business models and making those models more effective," he says. "People in the industry field have wanted to implement demand response procedures for over 30 years. Now we can finally do that."

As one might expect, utilities are very interested to see how this works out, and a big part of Monday's news is the active participation of a range of energy providers around the country. The closest and most enthusiastic Nest partner is Reliant, one of the biggest providers of power in the state of Texas. (It holds naming rights to the Astrodome.)

In some sense, the companies are strange bedfellows: Nest is the quintessential Silicon Valley startup and Reliant is part of a large East Coast-based energy company called NRG. But such alliances are part of the plan for Nest, whose game plan is to apply digital and Internet values to everyday tools that haven't changed for decades.

Indeed, NRG's CEO David Crane recalls the first time he visited Nest at its Palo Alto headquarters, where the parking lot is ringed with high-speed auto charging ports. "I had to take my tie off in the parking lot," he says. "But once we got to talking, we got over the sartorial differences, and found we wanted the same things." It probably helped that NRG strives be to a leading green power producer, and that as a competitor in deregulated areas, it's open to innovation more than the locked-in monopoly utilities.

One open question in this vision of services built with hyper-connected smart devices: who owns the relationship with the customer? Fadell thinks that people will be more likely to cooperate with conservation programs if they are associated with Nest -- as opposed to a power company, synonymous in people's minds with poor service and a bullying attitude. "The bottom line is people don't like their utilities," he says, carefully adding that Reliant may be an exception. "We want to be the trusted relationship between the customer and the utility."

But Nest's key partner David Crane says it "remains to be seen" whether the ultimate connection will be between digital services like Nest or utilities like his. He certainly doesn't want to drop out of the equation: "For us, customer interface is important."

For now, though, Crane recognizes that Nest's scheme can provide benefits in the short term, as well as a bridge to a new era where his electrical grid might be as social as Facebook is. "Here's the endgame--Nest ends up being the brains of the human energy system of the future," he says. "And we want to be part of that."